Need for autonomy – DAWN.com

Shahzad Saleem is one of those Pakistani businessmen that younger entrepreneurs look up to as role models. The CEO of Nishat Chunian (NCL) set up his first spinning factory with 14,400 spindles in 1990. Today, it is a vertically integrated textile company with an annual production of 85,000 tonnes of yarn, 54 million metres of greige fabric and 36m metres of finished fabrics. Among the listed textile companies, Nishat Chunian is now the fifth-largest firm in terms of sales and the fourth largest in terms of profitability.
“Ours is among those textile companies that have done well in and grown large on the strength of their efficiencies despite unsupportive government policies and regressive taxation. We might have grown much bigger than what we’re if the policies were conducive and consistent and the government had not tried to influence our investment decisions, intentionally or unintentionally.
For example, in the textile industry, we have a 1.5 per cent turnover tax, which is forcing manufacturers to grow vertically to avoid additional tax burden and refund issues. Turnover tax constitutes 4-5pc of the cost of a standalone garment/finished goods producer if they do not have backward linkages,” Mr Saleem told this correspondent in an interview.
Pakistan has the biggest vertical textile production capacity as the size of the total textile industry. This is not the case anywhere else. In India, the textile industry has expanded horizontally, with spinning capacities of over a million spindles installed by manufacturers. “Those who are in the garments/finished goods business in India are also big in their segments. In Bangladesh, garment factories employ 40,000 to 50,000 workers each. This shows how regressive taxation is hampering growth in our textile industry,” argues Mr Saleem.
Turnover tax constitutes 4-5pc of the cost of a standalone garment/finished goods producer if they do not have backward linkages
“It is not the job of a government to influence investment decisions. The state’s job is to make laws and facilitate investment to create employment. Tax should be low, fair, transparent and only on profits. Growth happens when people have employment opportunities. The role of the state in business has to be minimised,” says the NCL CEO, who is also vice-chairman of the Pakistan Textile Council, a new alliance formed by large producers to lobby for long term policies and tax reforms for the industry.
Mr Saleem is one of those business people who believe that there really is no shortcut to success. “If we want to grow and flourish, it is critical that we have an enabling investment environment. This means that we must’ve building blocks — quality healthcare and education for people, a fair tax regime and administration, a functional justice system, etc — of progress and development in place. Without these, we just cannot grow.”
“We haven’t made the right decisions in the last 40 years. Those who made the right decisions have grown bigger. As a nation, we should be very clear that we’ve to make right decisions, and that the process to fix healthcare, education and judicial systems has to start now. We need to respect the sanctity of contracts and stop calling each other thieves. Everyone is innocent unless proven guilty in a court of law. That is the cardinal principle of justice. The sooner the state accepts this principle the better.”
Mr Saleem, who as a board member was instrumental in the sale of 20pc shareholding of MCB Bank to Malaysia’s Maybank, is also concerned about the huge return Pakistan has to offer to investors at the expense of the wellbeing of its people due to increased country risk. “It is time that we as a country decide what kind of investment we want? Who do we want to deal with? Do we want to deal with investors who are willing to invest their capital in a highly risky country even if bombs are pouring from the sky but will demand a very high return of 100pc or those who want to work in a stable environment even for returns as low as 3pc? So the decision as to what kind of business environment we wish to create in Pakistan is critical for our future.”
Pakistan’s investment risk profile is exacerbated in recent years because of delays in regulatory approvals as the investors have to spend the bulk of their time in managing operational affairs or relations with the government and semi-government agencies. “If we want to mitigate investment risk we must create ease of doing business and slash the cost of businesses by reducing the state’s interference. Multilayered taxes and the high rate charged at every stage of production and on everything from phone calls to energy are eroding our ability to reinvest our earnings and hampering industrialisation,” the NCL CEO says.
Mr Saleem firmly believes that a ruthless tax administration, a major issue for businesses and individuals, is responsible for the very low tax base as no one wants to deal with tax authorities. “Many choose to stay out of the tax system even if they’ve to pay more tax indirectly. Don’t spare tax thieves but also compensate people who are being given a raw deal. It is a misnomer that people don’t want to pay taxes… but they also want security, education, healthcare, a functional justice system, reliable energy supplies, etc in return. When they don’t get what they need it reduces their ability and willingness to pay taxes.”
During the interview, Mr Saleem frequently spoke about the state’s growing role in the economy and private investment decisions, underscoring the need to curtail it. “Take the issue of gas supplies for captive power. The argument that the captive power plants with lower thermal efficiency shouldn’t get gas does not have a leg to stand on. This isn’t the state’s business to decide if a plant is efficient or not; its job is to supply gas to whoever needs it at one price. The argument that we don’t have gas and, hence, we should ration it and give it only to efficient users is misplaced. Do we give this argument for petrol? When we have weighted average cost of gas and are done with price anomalies, there’s a chance that many may go back to the national grid for electricity. Let the market decide who wants to use which fuel.”
He says the energy policy and pricing inconsistencies have created massive power generation capacity redundancies with the industry. “We have a museum of power plants in the country. In the last 30 years, we’ve set up captive power based on four different fuels. Who wants to invest in power plants if they get reliable and cheaper power supply from the grid? If the government gives us a pricing formula for the next five years we wouldn’t have to invest in captive power.”
Speaking about Bangladesh’s textile industry, he says their industry has grown because of supportive government policies. “If we had long term, consistent policies we’d have been far ahead of them. If you get stable returns even if those are low, you would want to invest and vice versa. Another difference between Pakistan and Bangladesh is that our industry has invested so much money in captive power for energy availability and sustainability — and is still doing so — that it is left with little to reinvest in its core business, that is, textiles. In the last one and a half years a lot of investment has come in textile and it will take another couple of years before new capacities come online. But we want results in two months. That’s not possible.”
Published in Dawn, The Business and Finance Weekly, January 24th, 2022
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